The Inventory Tsunami

For many dealers, the wave of bad luck that hit their used-vehicle inventories at the end of November — again — felt like a tsunami. After three straight big book drops, the phone calls and emails started pouring into our offices. Maybe not total panic, at least not yet, but there were certainly some deep-seated concerns.

All the calls were pretty much the same. “Have you seen what happened to the books? Can you believe it? What is going to happen next month? What should we do?”

I truly felt bad for my clients. But I have been warning dealers about this since late August, and I discussed it at length at Industry Summit in September: The “fall” was coming, and if you didn’t have your inventories leaned out and on the money, you were going to get hurt.

Warning Signs

To me, the signs were all there. The lease returns were at near all-time highs. The rental car companies were flipping their fleets at an accelerated pace. And with new-vehicle sales volume back to a 16 to 17 million seasonally adjusted annual rate (SAAR), hordes of trade-ins were rolling back onto your lots. Then you add in model-year change and new-car and -truck incentives that have grown once again, plus a spread in pricing between new and used versions, which further compresses wholesale values, and voilà! You have book falls.

What struck me as odd was that so many dealers didn’t see it coming, or didn’t react to my (often conservative) concerns. Hadn’t they seen this before — many times, in fact?

Then it dawned on me: They hadn’t. Many of my clients are young enough that the “norm” was all they had experienced. Prior to 2008, this was an annual occurrence, even if the cars were less expensive and the drop in dollars was likely never this big. I think I first got a taste of a true inventory tsunami in 1988. You tend to remember those scars. But the annual fall book drop was as certain as death and taxes, and it is largely why my used-car inventory always ran at a 30-day level, and why my gross profit on used cars was always strong.

Over the past six years, dealers have become accustomed to an artificial norm in which there was a scarcity of vehicles relative to the demand. That has now returned to the old normal, and it’s not changing again anytime soon. Oh yeah, and whatever you do, do not expect a strengthening of used-vehicle prices in the new year. It isn’t going to happen. The “new” old norm had books continually falling, just not nearly as severely from mid-January through August.

Dealers and managers who bought vehicles in mid-October and held them for just six weeks watched them devalue — in many cases, by well over 10%. That is an absolute reduction of profit. In the past month, dealers have been experiencing some very ugly inventory situations and there is no way to escape the pain. If you don’t get your clock cleaned by wholesaling the vehicles at an auction, you will get hit by the opportunity cost in reduced gross that occurs when you retail out of an overbooked unit.

Biting the Bullet

If you find yourself in the situation described above, I have some advice. You may not like it, but it’s the only solution that doesn’t require you to move money around from an inventory adjustment account, which was built from hard packs that already added more cost to your distressed inventory.

• Set an inventory level. Make it 30-day level on the ground. It is possible. I have one dealer client continually selling up to 200 used retail units with only 140 on the ground. Communicate these numbers to your entire team and have the discipline to stick to it. 
• Quit buying. Easy, right? The logic and immense temptation is that there are steals this time of year. But if you steal one, you need to mark it up to market and write another unit down by the equal amount or you will sell the new one and still have the old ones. Adding additional inventory — unless it is pre-sold — just exacerbates an already bad situation.
• Use it or lose it. Are you using an inventory write-down account or pack? Then for crying out loud, use it. I know dealers who book the pack to other income when they buy the car. What if it doesn’t sell? You have nothing to adjust it back to market. If you have taken false profit, be willing to give it back, because you never earned it in the first place. 
• Fix up, look sharp. Make sure the inventory you own looks and drives great. There may be a reason a vehicle hasn’t sold in 90 days. Find it, fix it and roll it back out with no delay. 
• Merchandise your lot well. In the Northern states, snow, ice and rain in the winter tends to impede moving the cars on the lot. Do it anyway. Assign each parking space a number and record where a used vehicle was sitting when it sold. Over the next 60 to 90 days, you will discover there are spots in which vehicles sell better than they would in others. Put your oldest vehicles in these spots. 
• Don’t penalize your sales team! Your sales team didn’t cause your inventory to bloat, so it doesn’t help to take their heads out of the game by penalizing their pay. If you normally own a car at some dollar amount relative to the book value, and you aren’t on flats, pay your commissions from that same spot relative to the book. If you stand pat, your sales team will learn which cars to avoid. 
• Delegate. Authorize your sales management team to take shorter deals or even “losers” based on what the market truly is on the vehicle. In the special finance arena, you are limited on what vehicles can be financed by the book values. Without additional (and unlikely) down payments, there is little you can do to overcome that.
• Treat the winners like winners. Don’t let your need to take short retail deals to get rid of stale inventory mask your ability to sell newer, fresher units at a substantial profit. You are going to need those deals to offset the losers. 
• Don’t repeat it. I learned my lessons 30 years ago and moved on. Now it’s your turn. It isn’t a sin to have a problem or make a mistake. Repeating the same mistake six months from now would be unforgivable.

So there you have it. No one looks forward to tsunamis. When they hit — and they always will, in the car business — you take your lumps and move forward as quickly and efficiently as you can, and you work to minimize your damage. Hopefully this time didn’t cost you dearly and it will serve as the impetus to ensure it doesn’t happen again.

Until next month, happy selling, and let’s make 2015 your best year ever!

Greg Goebel is the CEO of DealerStrong and the industry’s leading special finance trainer since 1989. He is an 18-year former dealer principal and a highly sought-after speaker,
author and consultant. [email protected]